The American Rescue Plan in Review
President Biden has now signed the $1.9 trillion relief bill commonly referred to as The American Rescue Plan Act of 2021 (ARPA) into law. (PDF Link here). Overall, the bill will provide relief in many forms, including but not limited to, direct stimulus payments to eligible recipients, unemployment assistance, aid for small businesses, and child tax credits. We touched on the expected inclusions from a health and welfare benefits standpoint a few weeks ago in a recent update but now that the bill is official we wanted to follow up with an overview of what will be formally rolled out in that regard in the near future now that the bill has been signed. As suspected, the final bill underwent some modifications during its time in the Senate before being handed back over to the House so there are some new aspects to discuss.
COBRA Subsidies – for involuntary terminations and reduction of hours QBs only
The January Fact Sheet that laid the foundation for the final bill directly targeted premium subsidies under the Consolidated Omnibus Budget Reconciliation Act (COBRA) in its proposal. At the time, it was estimated that individuals would be able to obtain a premium reduction amounting to 85 percent of their total coverage costs but the bill will actually provide 100 percent in COBRA subsidies between April 1, 2021 and September 30, 2021. This will effectively allow unemployed individuals (and their spouses and dependent children) to continue employer-sponsored coverage after losing employment without having to contribute towards any portion of their premiums through September 2021. ARPA makes this subsidy available to those who have either experienced an involuntary termination of employment or a reduction of hours. Employees who voluntarily terminated their employment are not eligible, and all other COBRA Qualifying Events do not quality for ARPA’s COBRA subsidy. Therefore, even an employee who experienced a loss in coverage in the early days of the pandemic would still be eligible for up to six-months of free COBRA coverage. Employers who follow the appropriate notice requirements will receive reimbursements equal to the premium amounts—and will have to seek these reimbursements as tax credits. Employers need to provide COBRA notice forms to eligible individuals and plans will be required to alert people to the availability of the subsidy, their specific enrollment window, and if their subsidy will end before September 2021. These notices will need to be distributed (generally mailed) within 60 days subsequent to April 1, 2021.
Second Chance Offers
Individuals who previously experienced an involuntary termination (or reduction in hours) but did not elect COBRA, or those who elected and subsequently dropped COBRA coverage, and who are still within their COBRA maximum coverage period, must be given a 2nd chance to elect COBRA to take advantage of ARPA’s subsidy. If such individuals elect COBRA coverage within 60 days of being notified of the subsidy opportunity, coverage would be provided prospectively from the second election date, not retroactively to the original COBRA event date. There could be a lapse in coverage between the original COBRA event and the new special, second election. Employers cannot force the QB to pay back premiums to take advantage of this second election opportunity. In no case is an individual eligible for more than the COBRA maximum coverage period measured from the original event date.
When will the subsidy end? Are there penalties for fraud?
The subsidy will end immediately if an individual becomes eligible for coverage under another group health plan or Medicare and would also end early if the individual’s maximum period of COBRA continuation coverage (typically 18-months) concludes prior to September 2021. The onus is on the enrollee to inform their former employer that they are no longer eligible for subsidized coverage. ARPA takes this a step further, however, subjecting enrollees who fail to update their former employers about a change in eligibility to a $250 fine and up to 110% of the full subsidy amount if the failure is determined to be deliberate.
Employer Tax Credit
Employers will recover premiums not paid by COBRA QBs through a payroll tax credit, similar to the manner in which employers recovered mandatory FFCRA (Families First Coronavirus Response Act) paid leave costs. If the tax credit exceeds the amount of payroll taxes due for a particular period, the employer can apply for a refundable tax credit. In most cases, however, the employer will have more payroll taxes due for any particular period than the amount of credit they can claim for lost COBRA premiums.
In addition to COBRA, the bill also addresses and expands ACA subsidies. As first laid out in the January Fact Sheet, ARPA will increase the generosity of ACA subsidies at every level and will cap the cost of premiums at 8.5 percent of an individual’s household income. This will be retroactive to January 1, 2021 and those currently enrolled in an Exchange plan will be able to claim an extra subsidy immediately.
Dependent Care FSAs
Another way ARPA is designed to benefit workers is through a temporary increase (only for 2021), in the maximum amount that can be contributed to a Dependent Care Reimbursement Account (DCRA-also known as a Dependent Care Assistance Plan (DCAP) or a Dependent Care Flexible Spending Account (DCFSA)). For 2021 only, ARPA increases the amount that may be elected on a tax-free basis, through a Section 129 DCAP, from $5,000 to $10,500 (or from $2,500 to $5,250 for individuals that are married but filing separately).
While these reimbursement accounts exist under IRC Section 129, they have been capped at $5,000 and have not been increased since 1986. While many will applaud this a welcome relief, this year has taught many employees to carefully plan their dependent care (day-care/custodial care) expenses because the use-it or lose-it features are still present. Recent COVID related and CAA-2021 related relief has helped, but not enough. Also, ARPA doesn’t amend the current non-discrimination guidance, which means that plans must still ensure that no more than 55% of all dollars in their DCAPs benefit highly compensated workers (generally owners, officers, and/or folks earning $125,000/year or more). So, while this may seem like an enticing opportunity to expand your employees use of DCAPs, we’re cautioning employers to carefully consider the impact that doubling the deferral limit might have on their plan.
As the DOL releases their FAQs, guidance, and Model Notices you can expect to hear from our team, your Account Managers and Sales Executives.